2021 Year-End Tax Planning Guide for Businesses
2021 marked another tumultuous year; with hospitals still under stress from the COVID-19 pandemic and labor shortages ravaging entire industries, we know you’re facing complex, nuanced challenges as you prepare for 2022. Potential tax legislation looms in the distance, and we will be there with you as changes unfold and new strategies take form.
Each year, our tax experts create a guide with the must-know information for your financial plan. Here, we compiled the highlights and opportunities to help you plan for the future and potentially save money. The guides are divided into recommendations for businesses and individuals.
We hope this guide serves as a beacon for your upcoming financial planning. If you have questions or concerns about 2021 and 2022 tax planning, don’t hesitate to get in touch with your Aldrich Advisor.
Tax Guide for Businesses
Table of Contents
- Business Meals Deduction
- Pension Plans
- International Tax Update
- Research + Development Tax Credits
- Oregon Tax Update
- California Tax Update
- Proposed Tax Changes for 2022
- PDF Version of the Guide
Business Meals Deduction
The Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA), passed as part of the Consolidated Appropriations Act of 2021 (CAA), provides a 100% deduction for meals and beverages provided by a restaurant during 2021 and 2022. The IRS issued an update, which clarifies what type of establishment constitutes a restaurant for purposes of the 100% deduction for meals.
A “restaurant” means a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the restaurant’s premises. A restaurant does not include a business that primarily sells prepackaged food or beverages, not for immediate consumption, such as a grocery store, specialty food store, liquor store, drugstore, convenience store, newsstand, vending machine, or kiosk.
Meals expenses paid to restaurants need to be segregated from other meal expenses to ensure the maximum deduction is allowed on your return. Also, since an employee or other recipient of meal per diem may use the per diem to purchase food or beverages from a source that is not a restaurant, a per diem paid without additional substantiation (i.e., a restaurant receipt) will remain subject to the 50% disallowance. If you do not currently retain receipts for per diem restaurant expenses, consider requiring employees to submit receipts for restaurant expenses to take advantage of the 100% deduction for 2021 and 2022.
Establish a Pension Plan
Under the SECURE Act, an employer can adopt a plan up to the extended due date of a plan sponsor’s income tax return, starting with the 2020 tax year. The change allows plans adopted by the filing due date for the year (including extensions) to be treated as though it was in place for the entire year. This gives additional flexibility to establish a plan and deduct contributions after a valid estimate of net income is established.
Pension and retirement plans are great ways to save on taxes now while saving for the future. We always recommend taking advantage of your retirement savings opportunities. Based on your unique business structure and size, there are many options to maximize and supplement savings. Before filing your tax return, consider discussing a potential retirement plan with an Aldrich Retirement Solutions Advisor.
International Tax Impacts — Canadian Tax Update
Effective July 1, 2021, if a nonresident (person or business) sells more than 30,000 Canadian dollars of products or services in Canada during the last four calendar quarters or in a single quarter, they are required to register in Canada for Federal Goods and Services Tax (GST) and Harmonized Sales Tax (HST).
Additionally, you may be required to collect GST and HST if the value of products or services is below the aforementioned threshold. As a nonresident, you can choose to register voluntarily for GST and HST purposes. However, once a nonresident registers in Canada, you must collect GST and HST on all taxable sales. The tax applies to all business-to-consumer transactions. During a business-to-business transaction, the Canadian customer must provide a GST and HST number to avoid taxes being applied.
If a Canadian customer provides its GST and HST number to a nonresident and mistakenly pays tax, the tax paid to the nonresident vendor registered will not be eligible as a tax credit or for claiming a tax paid-in-error rebate; rather, the Canadian customer will need to request a refund from the vendor directly. The new tax rules are broad enough to capture most industries and/or businesses, whether selling goods and services in-person or via online marketplaces.
If you feel like these rules might apply to you, or you have related questions, don’t hesitate to reach out to an Aldrich International Tax Advisor. We are ready to assist you and help your business navigate international taxes.
Research + Development Tax Credits
The federal Research and Development (R&D) Credit remains one of the most taxpayer-favorable vehicles available for encouraging domestic innovation and reducing federal tax liabilities. However, because of the Tax Cuts and Jobs Act (TCJA) passed on December 22, 2017, without new legislation, there will be significant changes as to how qualified expenses will be treated after January 1, 2022, and subsequently how robust the credit will be in the future.
Before enacting the TCJA, taxpayers were granted the choice to deduct or amortize research and experimentation expenses. Since the former is easier to track and document, and because the deduction improved and expedited taxpayer cash flow, most taxpayers chose to deduct those expenses in the year incurred. Domestic research and experimentation expenses incurred after December 31, 2021 must be amortized over five years (foreign research expenses were given 15 years).
This change aims to bring foreign research investments (mostly software and digital technology) back to the United States. However, these changes will adversely affect domestic taxpayers already conducting qualified domestic research and development. By amortizing qualified expenses (wages, supplies, and contractor expenses) for credit purposes, the benefits of those expenses are effectively reduced by 80% in year one, resulting in a reduction of gross credit benefit for that tax year.
Over the next five-year period, the net treatment of qualified expenses will improve incrementally, as each subsequent tax year’s qualified expenses overlap their amortization. However, this change removes the timely benefit of tax years where R&D spending increases significantly due to new projects, products, systems, and more.
To reverse this blow to the credit of domestic innovation, the American Innovation and Competitiveness Act (H.R. 4549) was introduced to Congress in 2019, and the American Innovation and Jobs Act (S. 749) was introduced in the Senate in 2021. These bipartisan bills effectively reverse the five-year amortization schedule and return IRC § 174 to its previous untouched and preferred state.
For 2021, the R&D tax credits are intact, and business owners should carefully consider maximizing the savings potential. In addition to new products and systems, R&D tax credits can include improving processes, equipment, and layout designs. Accuracy is critical for optimizing these credits, so we recommend always working closely with a trusted R&D advisor to evaluate your tax liability.
The status of this legislation is ongoing, and it is unclear what the timing and treatment of qualified expenses incurred will be in 2022. We will monitor this situation and provide updated results as they are made available. Until then, we will continue to help calculate R&D tax credits, ensuring the original intention and benefit of the credit for our clients.
2021 Oregon Tax Updates
New Portland Metro Taxes
For 2021, there is a new business income tax for the Portland Metro area. It is 1% tax on income for those in Clackamas, Multnomah, and Washington counties. Businesses with worldwide gross receipts in excess of $5 million will owe a 1% tax on net income earned in the metro area. Businesses with gross receipts less than $5 million will be exempt. For pass-through entities, the income taxed at the entity level will be excluded from the owners’ individual Metro income tax returns to avoid double taxation.
Pass-Through Entity Business Tax Increase
Oregon updated, and in some cases eliminated, the reduced tax rate for individuals with pass-through income. The rates were eliminated for owners with income from businesses with more than $5 million in ordinary income. For smaller businesses, the brackets generally increased the rates paid and created a minimum number of nonowner employees for eligibility.
Updated Tax Brackets
|Ordinary Income||Tax Rate||Nonowner Employee Hours|
|$250,000 – 500,000||7%||1 employee with a min. of 1,200 aggregate hours|
|$500,000 – 1 million||7.5%||2 employees with 2,400 aggregate hours|
|$1 – 2.5 million||8%||Four employees with 4,800 aggregate hours|
|$2.5 – 5 million||9%||Ten employees with 12,000 aggregate hours|
The Metro tax and the increased tax rate for Oregon pass-through income are in effect for 2021. As you begin to look ahead, be prepared for additional tax liability in April. Quarterly estimates will be due for the 2022 year as well, so the tax payments due in April may be significant compared to the prior year.
Ultimately, you will want to spend more time considering how to track revenue streams and employee working locations. These factors can impact tax responsibility and provide new avenues for future planning. Each company will be affected slightly differently by these new taxes, and preparing for the upcoming tax responsibility should be done now.
2021 California Tax Updates
Pass-through Entity Tax and SALT Workaround
Before the 2018 tax year, an individual taxpayer could deduct certain state and local taxes (SALT) without limitation for federal purposes. In late 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which imposed a $10,000 limitation for state and local taxes, severely limiting the most common—and oftentimes largest—itemized deduction.
For taxable years 2021 through 2025, California Assembly Bill 150 establishes the Small Business Relief Act, allowing qualified pass-through entities that are required to file a California tax return to elect to pay and deduct a pass-through entity tax of 9.3% on qualified net income, which is the sum of the distributive share of an entity’s income. Each eligible owner can elect to have the entity pay the tax on their share of the entity’s income.
The advantage of making this election is that it allows these pass-through entities to pay 100% of the tax at the entity level and then deduct the tax as a business expense. This will generally reduce the amount of tax the owners would normally pay since the deduction will not be limited as an itemized deduction on their personal return and instead reduce taxable income flowing from the pass-through entity, with no limitation.
The consenting pass-through entity owners then claim a nonrefundable credit for the amount of tax paid on the owner’s distributive share of the pass-through entity’s net income on their California return. The credit is allowed in full for nonresidents and part-year residents, and it’s not required to be prorated. Unused credits can be carried forward for up to five years.
For the 2021 year, the pass-through entity tax is due on the due date, without regard to extensions, which is March 15, 2022, for calendar-year taxpayers. For 2022, amounts will be required to be paid by the entity as estimated tax payments.
If you receive California pass-through income, this election should be considered for the 2021 tax year. You also may want to consider reducing your California estimates for 2021 at the personal level if this election will be taken. If this election is determined to be beneficial, businesses should consider making the tax payments by December 31, so the tax deduction will be allowed on the 2021 return and thus reduce the current year’s income.
Register with CalSavers
The CalSavers program is a state-administered, Roth-like retirement plan available to California employees working for businesses that don’t offer a retirement plan. By June 30, 2022, nonexempt employers with more than five California W-2 employees must register with the program. Employers who already provide a retirement plan do not have to participate in the program but must go on the CalSavers program website and register as “exempt.”
Employers that fail to comply with the program requirements will be subject to a $250 per employee penalty after receiving a notice of noncompliance from the Franchise Tax Board. The penalty will be increased to $500 per employee if the employer does not comply within 180 days. Employers do not have any liability for an employee’s decisions to participate in the program, for their investment decisions, or the performance of those investments.
Business owners who don’t already have a retirement plan should consider adopting a plan of their own before defaulting into the program.
A company-sponsored plan provides distinct advantages for a business owner or executive’s own retirement savings. They allow for special testing to provide greater contributions to owners and executives as long as a minimum employer contribution is made for eligible employees. In addition, all employer contributions made to a company-sponsored retirement plan are tax-deductible. Employer contributions help employees accumulate enough to retire and, at the same time, pay for themselves in tax savings for the company. Learn more about the CalSavers program and how you can optimize your organization’s retirement plan.
Proposed Tax Changes for 2022
The Biden administration proposed several changes to the current tax code. In mid-September, the Ways and Means Committee advanced a tax plan that followed the administration’s proposals in some areas and strayed in others.
Please note that these are only proposals and not part of a final bill, and the majority of the changes would not be effective until 2022.
Highlights of the proposed changes include:
- Increasing corporate tax rate from 21% to a top rate of 26.5% for tax years beginning after December 31, 2021. The new rate would be a graduated rate versus the current flat rate.
- Implementing other tax increases, including changes to the net investment income tax and all income to S corporation shareholders.
- Introducing a limit on the Qualified Business income tax deduction to $400,000 ( i.e. when eligible business income is over $2,000,000).
- Delaying the requirement to capitalized and amortize research and experimental expenditures until 2026 (originally slated to begin in 2022).
House Democrats released their proposal for tax changes in September, with expected conversations and passage of some version of a tax bill before year-end. There may be some planning opportunities to move income or deductions from one year to another, along with other options to minimize exposure. As more definite information is available, we will provide updated recommendations and suggestions.
Prepare for the Future with Aldrich
As a reminder, we recommend keeping all relevant tax documents on hand for a minimum of seven years. You can find a detailed chart with record retention best practices here.
We know that your business faces unique challenges based on the industry, employees, and region. Our expertise can help you navigate the nuances of financial planning to help you achieve your goals. Your Aldrich Advisor is here to provide support and answer your questions. Reach out today to schedule a meeting to discuss your 2021 tax plan.
This year-end tax planning guide is based on the prevailing federal tax laws, rules, and regulations. It is subject to change, especially if Congress enacts additional tax legislation before the end of the year. Your personal circumstances will likely require careful examination.
This guide was written with the most current information as of October 1, 2020. Please continue to check back for future updates.
PDF Version of the Planning Guide
Download or print a PDF version of this guide to keep it easily accessible as you plan your business’ future.